Peter Guidi's Blog

Posts Tagged ‘Mastercard’

The Battle of the Titans continues as NACS squares off with the ETA over mobile payment.

In Convenience Store, merchants, mobile payment, Retail Payment on October 30, 2014 at 12:05 pm

Greek Mythology and the payments industry seem to have a lot in common. There’s something similar about CVS and Rite Aids decision not to accept Apple Pay that reminds me of when “Cronus attacked Uranus, and, with the sickle cut off his”…..well, you get the point.

There has been a lot of noise about mobile payment over the last few years. Confusion about technology and economics clouds the issues. Now, in the same tradition of Durbin (legislation) and Brooklyn (litigation), banks and retailers are setting the stage for another battle over mobile payment. The new issue is; does Apple Pay, Softcard and other NFC based solutions simply enable the traditional payment providers (read fees), or is MCX just an anti-competitive alliance of retailers created for no other reason to leverage the emerging consumer acceptance of mobile payment systems to drive the cost of payments down? In the middle is the consumer who simply wants convenience and choice.

The Apple Pay launch opened the latest salvo in the fee/service war. The Electronic Transactions Association is saying that the decision by CVS and Rite Aid to block mobile payments services like Apple Pay, Google Wallet, and Softcard is “anti-consumer and anti-competitive”. NACS, apparently in support of the Retailers MCX relationship is saying that Apple Pay essentially allows “Visa/MasterCard monopoly into mobile payments”. saying “Those two dominant credit card networks have faced a lengthy series of antitrust actions from the U.S. Department of Justice and merchants over the years due to their anticompetitive conduct. Now, they are working feverishly to require merchants to accept their preferred technology, near-field communications (NFC), so that they can extend their dominance into the future.” How supporting MCX, a program that requires exclusivity within the mobile payment channel, even the exclusion of non-VISA/Mastercard 3rd parties is not Anti-Competitive is a bit of a mystery.

Let’s be clear, MCX could allow either Visa or Mastercard into the CurrentC wallet, it’s a business decision, not a technology issue. Apple was clever enough to shift costs (at least for now) to the issuer, rather than the merchant. This opened the door to many merchants avoiding the interchange conversation. Why many merchants have chosen not to join MCX might have something to do with membership fees, product availability, or perhaps that it is an ACH program rather than a new low cost 4th network. After all, there are many ACH providers, why spend a lot of money joining a coalition only to pay a high membership fee for a product that is already available from other providers?

The reason the industry is lining up to fight over the CVS & Rite Aid decision is because this is another skirmish in a multi-year battle over the fees retailers pay, or banks earn, when consumers make a payment. For retailers simply wanting mobile payment at low cost, the program is available today. Retailers can compete with banks for consumer’s method of payment, that’s the “Competitors Code”. The point is, Retailers don’t need legislation or litigation to drive fees down, competition will do the job. If CVS and Rite Aid don’t want to accept Apple Pay, so be it. On the other hand, how does a restrictive exclusive contract with MCX serve the consumer?

Advertisements

The MasterCard/Visa settlement; an alternative point of view.

In alternative payment, Bank Fees, Bank Tax, Convenience Store, credit card, debit card, interchange, payment, Payment card, Peter Guidi, Platforms, retailers, swipe fees, Uncategorized on August 9, 2012 at 2:18 pm

Opportunities are often difficult to recognize and they do not come with their values stamped upon them. It is often hard to distinguish between easy choices and those of opportunity; such may be the case with the retail industry’s reaction to the proposed Visa, MasterCard Settlement. As it stands today the proposed “Brooklyn” settlement has been rejected by nearly all retailer associations like; NACS, SIGMA, NGA as well as multiple retailers including large national and smaller local companies and even Senator Dick Durbin has added his disapproval to the chorus of rejection. It’s fair to say that the proposal is “Dead on Arrival”. Even so, I wonder if by refusing to embrace this settlement an opportunity is being missed.

With so much opposition to the settlement, how is it possible that an opportunity may be missed? The answer lies in the fundamental assertion that retailers can compete for the consumer’s method of payment steering them to low cost payment, rather than relying on legislative price controls or judicial action that seek to control the payments industry. Core to this belief is that there is significant competition in the credit card industry, it just happens to be between banks competing for consumers, rather than between retailers and banks competing for the consumers method of payment. There is nothing unusual about this model, it’s standard platform economics. The more end-users (retailers accepting cards and consumers with cards) on either side of the platform (MC/VISA), the more valuable and hence expensive the platform. This is why banks do not negotiate fees with retailers. Their mission is adding value to the consumer to carry and use their card for payment. The result is richer reward programs that add cost and drive the transaction fees higher. The retailer’s perception is a monopolist market, when in fact, as consumers we all participate in the very same economic activity.

In today’s rapidly evolving payment landscape consumers have many payment options. Surcharging creates an opportunity for the retailer to compete with the associations and promote low cost payment options. The challenge with surcharging is that it forces retailers to compete not just for the consumers purchase, but also for their method of payment and as a result some retailers may choose to use card payment as an economic advantage. Up until the proposed settlement this concept was merely theoretical because the card association rules prohibited the activity. While some retailers had experimented with cash discounts, the concept of charging for credit or debit card use has not been tested. The reason there is no information on surcharging is because it was prohibited by the associations operating rules. The Associations prohibited surcharging because it exposes the real cost of payment to the consumer and therefore allows the consumer to understand that using their card is not free.  This capability provides a powerful new tool for retailers to steer consumer payment choice.

Now armed with the tool needed to expose this cost, retailers are more concerned about the perception and customer services issues than the costs of payment. One retailer was quoted in NACS Online as saying he wants customers “impressed by the quality of products and services they receive” lamenting that surcharges for payment may appear to penalize them for the use of the card saying “it does not make for very good customer service”. This statement tends to suggest that the current costs accepting credit cards is acceptable, a suggestion that tends to explain why the opportunity presented by surcharging may be overlooked.

It’s unlikely that we will learn the answers to these questions in the near future. The industry is committed to seeking significant concessions that go beyond the proposed settlement which means the lawsuit is likely to move forward.  Stay tuned……

Debit or Credit, the role of merchant-issued rewards and the consumer’s choice of method of payment.

In credit card, debit card, interchange, loyalty, merchants, payment, swipe fees on December 28, 2010 at 10:45 am

On December 16, 2010 the fog began to lift on where Section 1075 of the Durbin Amendment would lead as the Federal Reserve Board issued its proposed interpretation of the legislative language. One question on many peoples mind is how the new regulations will impact consumers. Voices on the banking side seem skeptical that the regulation will have any positive impact for consumers sighting Australian studies where retailer prices appear unchanged as bank fees rose and payment options declined.  On the other side of the argument, the National Retail Federation welcomed proposed regulations saying “a significant reduction in the fees would result in lower costs for merchants and could lead to discounts for their customers.”

NRF Senior Vice President and General Counsel Mallory Duncan said. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.” He goes on to say that the NFR “will work closely with the Fed as these regulations are finalized to ensure that the reduction in fees – and the amount of money retailers can offer customers as a discount – is maximized.” And so it seems that the stage is set for retailers to offers consumers discounts if and when they use a debit card to pay for their purchase.

In a recent article published in PYMNTS, Katherine M. Robison of O’Melveny & Myers LLP says that “while the Board says it understands and appreciates the importance of debit cards to consumers, it is disturbing how little the interests of consumers entered into its justification for the Proposal”.  She goes on to say that “The debit card market is a two-sided one, with merchants who accept debit cards on one side and consumers who use them on the other.” Her point being that in this two-sided market an action that may decrease consumers’ demand for debit (say by making debit transactions less appealing to them) will ultimately decrease the utility of debit to merchants.  Further, if Banks add fees to the checking account or the use of the debit card while eliminating reward programs consumers will also find debit less appealing. She adds “So while lower interchange fees may encourage more merchants to accept debit cards, at that point there may be fewer consumers who want to use them.” Enter the role of merchant issued rewards.

Consumers could benefit from a rewards battle between merchants and banks for their method of payment. On one side will be the issuers of credit cards, on the other will be the retailer and the winner could be consumer as they rack up rewards by choosing either credit or debit. Their choice will be simple, choose to use a bank issued credit card and earn rewards like airline miles, or choose a debit card (either bank or merchant issued) and earn retailer funded rewards. The decision will be based on which offer the consumer finds more attractive? 

Over the last five years a variety of alternative payment providers. Like National Payment Card Association, have brought forth payment technologies like merchant issued debit cards designed to circumvent the traditional payment processing network delivering a lower cost transaction to the retailer. Now with the Fed’s proposed interpretation of the rule, bank issued debit cards will carry similar fees and so the retailers will face an analogous implementation challenge. How does a merchant motivate a consumer to use a lower cost form of payment? Merchant rewards are the obvious answer. And so the question is; will retailers recapitalize the cost difference between a traditional credit card transaction and the new debit fee and use the savings as a reward? And if not, why would the consumer choose to use a debit card rather than a credit card? Retailers will face a variety of challenges leveraging these new fees to their advantage.  Most notably is that the possibility that a debit transaction with merchant funded rewards may actually cost more than the original bank fee for a debit transaction. 

(http://www.linkedin.com/in/peterguidi)

“Reasonable and proportional”, is issuance and the cost of reward programs a part of the “incurred payment processing costs”?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card on June 17, 2010 at 9:34 pm

Lost in the debate over interchange fees and the Durbin amendment is a focus on how payment card products reach the consumer. One of the key points of the amendment is to mandate that the interchange fees on selected debit transactions be “reasonable and proportional to the cost incurred in processing the transaction” Merchants have taken the position that as the volume of transactions have increased, the economies of scale and overall effectiveness and efficiencies of the payment processing network have improved, and therefore the cost of transaction processing have gone down. The fact that interchange has gone up during this period is used as evidence that system is corrupt and anti-competitive. This point is heard when Senator Durbin says that government needs to “reasonably regulate this system”.

Missing from the debate on interchange and what constitutes the costs incurred in processing a transaction is consumer acquisition. Consumer acquisition costs are incurred in at least two areas; enrollment (consumer application) and rewards (loyalty programs & retention), to say nothing about overhead, like customer service. This week both Citigroup and TD Bank launched new “Debit Rewards” programs. Citigroup launched a 5% debit card cash back promotion, while the TD Bank program offers 1 point for every $1 dollar spent. In both cases, these reward programs are only available to consumers who use signature rather than PIN debit. As a consumer, which program should I choose? These are two highly competitive businesses, each offering me a product and a service. Each has put their best foot forward and is universally accepted. Both have used a different approach; one uses point’s, one utilizes cash back, and the choice is mine. If the Durbin amendment is successful and retailer acceptance is selective, and interchange fees regulated, would the consumer have these same choices?

Merchants involved with loyalty programs understand the costs associated with advertising and marketing to drive enrollment and fund reward programs. Industry sources report that up to 40% of all interchange dollars paid by merchants are used to support payment card loyalty programs. That means, in 2008, consumers may have earned up to 19 billon dollars in consumer rewards; a cost borne by the merchant, but also a cost to the issuer (bank).

The suggestion is that high fees are a result of no competition in the payment card market. In reality, the high fees are a result of intense competition. It just happens, that the competition is between banks (issuers) fighting for the consumers’ business.

(http://www.linkedin.com/in/peterguidi)

The Final Frontier: the death of cash as a payment and the merchant’s role in the battle plan.

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers, Uncategorized on May 19, 2010 at 3:03 pm

MasterCard and Visa have identified the enemy; CASH! They have devised the final battle plan, the pre-paid reloaded card. VISA’ ReadyLink and MasterCard’s various solutions including a Wal-Mart payroll card are the weapons. The objective is clear; destroy paper currency and extend the reach of the platform and resulting fees over the last bastion of disintermediated transactions. The result will tax every dollar earned and spent by consumers.

The plan is cloaked in platitudes like; “serving the under-severed” or making the product “Green”. Like lambs off to the slaughter, Retailers have joined in the strategy with 7-11, Marathon and Blackhawk introducing Visa’s pre-paid reloadable card, ‘ReadyLink” to their customers. 

The core of the plan is to attack the enemy at its source, payroll. The concept is simple; prevent cash from ever reaching the hands of the consumer. The most efficient route to achieve the goal is to assure that consumers never receive cash by loading their payroll on a pre-loaded card, rather than receiving a payroll check. Say good bye to the check cashing business! When consumers load payroll onto a card the platform has captured the cash and will now earn fees on every purchase or payment made using the card; this is a brilliant strategy and is classic example of creating network effects. The growth of mobile payments and the preference of the “E-Generation” for electronic media is the sound of the bells ringing the death tome of cash in the future.

Acting is the work of two people-it’s only possible when you have the complicity. VISA estimates that there are 80 million underserved consumers receiving $1 trillion dollars in annual income that rely on cash for everyday transactions. Retailers will look back at their participation in these programs as a tactical error in the fight against transaction fees.

(http://www.linkedin.com/in/peterguidi)

73rd NPECA Annual Conference – What is alternative payment

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers, Uncategorized on April 28, 2010 at 11:21 pm

There are at least two possible ways to answer the question; “What is alternative payment?” one practical, one academic.

Practically, any payment solution that is not MasterCard or Visa is alterative payment. This is true because up to 90% of all card acceptance fees occur at the pump and these two associations, along with AMEX and Discover control a monopolistic percentage of the payment market. Practically, any payment other than the major card associations is an alternative payment. An Academic approach to the question is more elusive.

Suppose that “alternative payment” is a payment where the payment relationship is between the retailer and the consumer. If so, then cash is the ultimate alternative payment?  But what about all the emerging payment systems like NPCA or PayPal, Bling or BillmeLater? Are they alternative payment? What if we changed the meaning to say that: “alternative payment is any system that creates disintermediation between consumers, retailers and their financial institutions”. Does eliminating the network roles and captured costs of the current payment processing network define alternative payment or is there more?

For the convenience petroleum retailer alternative payment is a system that disintermediates the transaction while enhancing the customer relationship. Alternative payments systems allow the retailer to focus on the “Demand-Side” of payment using incentives and tracking data to influence the consumers “Method of Payment” and enhance customer loyalty. The result should be lower card acceptance costs and increased sales. Retailers using this definition will find the final answer to the question, alternative payment is one that delivers additional profit, rather than additional cost to the retailer.

What decision factors should retailers use when choosing between an open-loop vs. closed-loop alternative payment solutions?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers on April 22, 2010 at 3:31 pm

Prevailing wisdom is often wrong.  Mark Twain said: “Every generalization is dangerous, especially this one”.

The prevailing wisdom on payment is that open-loop systems are superior to closed-loop systems. Open-loop payment systems have four stakeholders; consumer, merchant, issuer, and network. It is generally accepted that successful payment systems offer the consumer at least three attributes; simplicity, safety and desirability. This has lead to the mantra that only ubiquitous payment products can achieve “top of wallet” status. The reason being that the consumer wants one method of payment rather than multiple options as a matter of convenience; consequently, it’s simple and desirable.

Yesterday, Target announced they are dropping its Visa cobranded program. The Target program was one of Visa’s largest cobranded programs. This decision is the strongest sign yet that merchants are reevaluating the benefits of offering general-purpose credit cards. Target said they tested a Target credit card and that research indicated that the Target credit card drove more sales. The test made a clear case for its private-label cards over general-purpose cards. So much for “prevailing wisdom”.

Closed-loop payments systems have two stakeholders, the consumer and the merchant. When a payment system creates disintermediation between issuer and the network (acquirer) the result is increased engagement between the retailer and the consumer. Engagement is good for business. If consumers are interested in single purpose cards, as Target’s test indicated, why share the relationship with two other parties?

Prudent retailers will consider the results of Target’s decisions and other trends in payment before making a final payment system decision. Recent research indicates that 38% of consumers will reduce the use of their credit cards. Visa has reports that debit usage has surpassed the use of credit. Last week VISA announced an increase in Debit rates. Retailers looking to leverage these emerging payment preference trends should consider closed-loop ACH decoupled debit. (http://www.linkedin.com/in/peterguidi)

The convergence of payment and loyalty programming and the trends influencing consumer payment behavior.

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 30, 2010 at 11:52 am

Confluence is the act of flowing together; the junction of two or more bodies of water; the place of meeting. Like two rivers, convenience store operators navigate both payment and loyalty relationships. The confluence of these two programs is the card and the consumer. Data suggests that retailers can recapitalize “Swipe Fees” as “Rewards” by leveraging consumer’s willingness to participate in loyalty programs and their increased preference to use debit payment.

According to “The Big Sort, 2009 COLLOQUY Loyalty Marketing Census, in 2008, 51 million consumers participated in Fuel/Convenience loyalty programs.  2009 saw the further expansion of loyalty with a number of retailers launching new programs. That same year, 422 million consumers participated in Financial Services loyalty programs (credit/debit rewards). While the convenience store industry was hammered by low margins under onerous interchange fees, financial institutions used up to 45% of the “Swipe fees” to drive their business forward, achieving nearly ten times the number of participants. 

The January 2010 version of “The 2008 Survey of Consumer Payment Choice” published by the Federal Reserve Bank of Boston reveals data demonstrating consumer’s increased participation in debit rewards programs.

\The two studies point to specific trends that support the confluence of loyalty and payments. Consumers now belong to an average of 14.1 loyalty programs, but only 3.5 credit cards. The average consumer has adopted 5 “Payment Instruments”. More consumers have and use debit cards than credit cards (88.2% vs. 78.3% w/ 208% increased usage). Consumers have more “loyalty” to their debit card than credit card with 27.5% of consumers discarding a credit card, while only 5.9% reported discarding a debit card. The analysis indicates that consumers are more willing to join a loyalty program than a payment program. Further when customers use a card for debit, they are less likely to discard the program making for a double win; more enrollment with less attrition.     

The conclusion is that growth in Fuel/Convenience loyalty programs and increased debit card usage considered in juxtaposition with the high rate of attrition of credit card users suggests that retailers offering debit rewards as a feature in the loyalty program could recapitalize a significant percentage of “Swipe Fees” as consumer rewards resulting in greater consumer loyalty and increased ROI.

http://www.linkedin.com/in/peterguidi

Is “Social Justice”, the new rallying cry in the battle over interchange fees? What’s next price controls?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 18, 2010 at 9:51 pm

 “Pandora opened her jar and unleashed many terrible things on mankind.”

 In February 2010 the Consumers for Competitive Choice (C4CC) released a report called “The Costs of “Charging It” in America” by Shapiro & Vellucci: The report offers a number of conclusions, including the proposition that government regulation of interchange fees is Social Justice. Social Justice is a concept used to describe the movement towards a government regulated socially just world. The report suggests that the economics behind payment platforms, Two-Sided Markets and their inherent “Network Effects” create negative “Regressive Cross-Subsidies”. The suggestion is that interchange fees create a system where the poor pay for the privileges of the rich.

 In a paper written by Bolt & Chakravorti titled “A Review of Payment Card Economics” published in the November 2009 Lydian Payments Journal concluded “There is no consensus among policy makers or economists on what constitutes an efficient fee structure for card payments”. They go on to say “efficiency of payment systems is measured not only by the costs of the resources used, but by the social benefits generated by them”. Shapiro & Vellucci would seem to agree when they add “The current credit card and debit card systems provide valuable services to consumers and merchants and those services involve legitimate costs and therefore prices. Apparently the concept of profit for risk is not in their equation.

Last week a Delaware politician suggested mandating Full-Service Gas as a job creation initiative. Today the NRF urged Senator Dodd to add Interchange reform to the financial services reform bill. The C4CC published report suggests that Interchange Fee Regulation is a morally just cause towards achieving a level of Social Justice. Are retailers ready to see Social Justice added into their margin equation?

(http://www.linkedin.com/in/peterguidi)

Orwellian market principals; is legislation regulating interchange fees a harbinger of greater merchant acceptance of government control over industry?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 10, 2010 at 6:59 pm

Close on the heels of Barney Frank’s decision not to pursue HR 2382, and as the industry plots its next step, merchants might want to consider the words of Canada’s Finance Minister Jim Flaherty. The Finance Minister is quoted as saying; “(he) would exercise the new powers (sic. impose card use fees) if the industry failed to comply with a proposed VOLUNTARY code of conduct. Merchants’ should ask themselves if this is the type of government intervention that is appropriate in the United States? Merchants might ask if they are opening the chicken coop to the wolf. If the government can regulate interchange fees, what else could they control? More importantly; who will determine what a “fair price” is and will merchants be pleased with a “regulated result”?  What if the Government chooses to raise fees rather than lower fees?

One way to evaluate this question is to consider how merchants feel about interchange fees in countries with government regulation? I read a blog about one consumer’s experience with credit card fees in New Zealand and Australia. He reports that most merchants specifically asked if he wanted to pay using signature or PIN? One restaurant is reported to have a sign stating “$15 min.” explaining that credit card fees were too high to allow purchases under $15 using a credit card. Imagine that? Even with card fees at 0.55%, merchants reported interchange fees are too high.

The current political environment is ripe for all sorts of government intervention. Government sponsored higher interchange fees are possible, particularly if interchange is seen a source of tax revenue. The merchant community could find that advocating interchange regulation might lend support to adverse government action in areas like Motor Fuels, Tobacco, Labor and Healthcare and other issues where they seek less, not more, government involvement.

(http://www.linkedin.com/in/peterguidi)